Ten billion dollars! Sixty-seven billion! Four hundred billion! As index providers took baby steps last year toward adding Chinese shares to their benchmarks, heady estimates abounded for the ensuing wave of foreign buying.
This year, while inclusion has accelerated, a more-modest reality has set in.
This week, index giant
confirmed its inclusion factor—the weighting it gives Chinese stocks relative to their market capitalization—would rise to 15% from 10% for the flagship Emerging Markets Index at the end of this month. Yet overseas investors have resumed selling Chinese equity through the Hong Kong Stock Connect platform, unloading about 15 billion yuan ($2.13 billion) this month so far, net of purchases.
Year-to-date net inflows now stand at just below 95 billion yuan, down from more than 120 billion yuan at the end of February, when MSCI said it would gradually lift its weightings to 20% from 5%. In April and May, foreign investors actually used Stock Connect to disinvest from Chinese stocks—something that has rarely happened before. Benchmark indexes for the Shenzhen and Shanghai exchanges are both little changed since the February MSCI announcement.
That’s not to say index inclusion doesn’t support stock prices—just that it’s easy to make too much of this effect.
Inflows this year have mostly hinged on other factors. A burst of optimism for stimulus that followed the Lunar New Year pulled international buyers in. Escalating trade tensions, and souring views of the Chinese economy, in April and May sent them packing again.
So why did analysts get it so wrong? Some forecasts just looked hopelessly optimistic from the outset. But a bigger factor seems to be that many active managers of emerging-market funds, probably wisely, feel free to diverge from their benchmarks far more than their counterparts do in developed markets. Overall, they seem to have held off loading up on China, given the difficult backdrop.
Some investors have also become more comfortable with the idea of investing in Chinese equities separately from their existing emerging-markets exposure—which further upsets calculations about inflows following entry to a broad benchmark.
It might have all been worse without index inclusion, but that doesn’t seem to be able to change the direction of travel. In China at least, buying stocks because you think they’ll subsequently be needed by index-huggers is proving a fool’s errand.
Write to Mike Bird at Mike.Bird@wsj.com
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